The Legal 500

Only a small proportion of patent disputes proceed as far as a court judgment; the vast majority are resolved well before that stage. In cases where the decision is in favour of the patentee, the next stage is to assess the compensation to be paid by the infringer. The successful patentee can choose to recover either the profits made by the infringer (account of profits), or the loss it suffered (damages) as a result of the infringement. If the quantum cannot be agreed, the matter returns to the judge (the damages inquiry).

The damages inquiry and the task of proving loss of profits can be complex and expensive, and sometimes requires the input of forensic accountants. Also, by this stage the parties are often suffering from litigation fatigue, meaning that of those cases in which the patentee has been successful, few proceed to a full damages inquiry. However, one such inquiry took place recently, in the case of Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd and another. This case is interesting because it demonstrates the many different ways in which an unstopped infringer can inflict financial loss upon a patentee.

Background

Ultraframe designed and sold plastic conservatories called the ‘Ultralite 500'. The Ultralite 500 was a groundbreaking product, as it allowed for conservatories to be built at a much lower angle to the supporting wall than previous conservatory systems. By 2002 the Ultralite 500 had an 80% share of the ‘low-pitch' conservatory market. Part of the Ultralite 500 system is protected by a patent, owned by Ultraframe.

Before 2002 the defendants (collectively ‘Eurocell') were one of the largest distributors of the Ultralite 500. However, in March 2002 Eurocell stopped distributing the Ultralite 500 and launched its own product called the ‘Pinnacle 500', which was designed to be a direct competitor to the Ultralite 500.

Ultraframe successfully sued Eurocell for infringement of its patent and of its unregistered design rights in the Ultralite 500. The parties were unable to agree the quantum of damages, hence the need for a damages inquiry.

In the judgment on the damages inquiry, Kitchin J summarised the legal principles to be applied when assessing damages. The basic principle in relation to damages, as explained in General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd and later in Gerber Garment Technology v Lectra Systems, is that damages are not punitive and that the claimant should be restored to the position that it would have been in but for the actions of the defendant, as long as the damage is foreseeable and caused by the defendant's actions and not excluded from recovery by public or social policy.

Ultraframe's claim for damages broke down into the following seven elements:

1) Lost profit on lost sales

If the effect of an infringement is to divert sales of the patented product away from the patentee, then the patentee can claim loss of profits from those sales, including sales that would have been made to the infringer.

The assessment of the level of sales that would have been made by Ultraframe but for Eurocell's infringement was not straightforward. The judge concluded that approximately 89% of the sales of the Pinnacle 500 represented lost sales for Ultraframe, and it was entitled to its loss of profits.

2) Sales that are not lost sales

The remaining 11% of Eurocell's sales would therefore not have been made by Ultraframe. In respect of such sales, damages are assessed as the royalty that the infringer would have paid had it taken a licence from a willing patentee.

The judge stated that royalty rates for mechanical type patents are commonly about 5%, but a figure of 8% was decided upon, as the Ultralite 500 was unique and the market leader at the time of the infringement.

3) Price erosion - past

The price of Ultralite 500 was reduced by Ultraframe partly as a result of the aggressive pricing of Pinnacle 500. Such loss on past sales is recoverable and amounted to the difference between the price Ultraframe actually achieved for Ultralite 500 and the price that it would have achieved but for the infringement.

4) Price erosion - future

Looking forward, although Ultraframe would no longer face competition from the Pinnacle 500, it would not be possible immediately to restore prices to their previous level and so loss attributed to future price erosion was also recoverable.

5) New design costs

Ultraframe spent £1.5m on developing a new system called ‘Elevation' to compete with Pinnacle 500. Potentially, such development costs also could be recoverable, but in this case the judge concluded that the Elevation development project would have taken place anyway. As the project costs therefore did not flow from the infringement, they were not recoverable.

6) Additional sales

The sale of a product often leads to the sale of accessories and consumables. If sales of the original product drop due to an infringing product, sales of accessories and consumables may also drop. In such circumstances, the patentee is entitled to its lost profits on those so-called convoyed sales. In the Ultraframe case, however, Ultraframe was unable to establish a sufficiently close link between the original sale and convoyed sales to recover damages on the latter.

7) Disruption to market

Ultraframe argued, successfully, that the infringement caused disruption to its trade channels and customer connections. The judge estimated such loss at £200,000.

Conclusion

Although Ultraframe was not successful under every head of damage, the above does illustrate the many different ways in which economic harm can be inflicted by an infringer. When infringements take place, the IP rights holder often looks only at its lost sales and fails to appreciate that the infringements can harm its business in many other respects. These additional potential losses need to be taken into consideration. In the Ultraframe case, the award of damages of approximately £3.3m, as well as the ongoing injunction against further infringements, more than justified the costs and the risks of enforcing Ultraframe's IP rights.

Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd and another [2006] EWHC 1344 (Pat)

General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1976] RPC 197

Gerber Garment Technology v Lectra Systems [1995] RPC 383

By David Knight, partner and Edmund Wilkie, solicitor.